CHAPTER 3

INVENTORIES ACCOUNTING SYSTEM

Definition
• • • • • Para 5 FRS 102 Inventories are assets: A) held for sale in the ordinary course of business B) in the process of production for such sale or C) in the form of materials or supplies to be consumed in the production process or in the rendering services

.CLASSIFICATION Para 11 FRS 102 “ Inventories should be measured at the lower of cost and Net Realizable value” Net Realizable Value (NRV) – is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

PERPETUAL & PERIODIC INVENTORY SYSTEM • There are two ways that a trader may maintain stock records: • 1) Periodic stock record • 2) Perpetual stock record • What you have learned before is maintaining stock records using periodic method .

Instead.PERIODIC INVENTORIES RECORD • This method is usually used by firms selling goods that have a low individual unit value such as stationary. • Under this system. no attempt is made to determine the cost of goods sold for each sale at the time of the sale. the cost of goods sold for all of the sales in a period is determined at the end of the period . Close control of such items is not necessary nor it is economically sound.

stock accounts at the beginning and at the end of the period. Any stock movement eill be recorded as follows: • Sales: Debit Debtor Credit Sales (Being credit sales) .Continued • In a periodic system.

Continued Sales: Debit Debtor Credit Sales (Being credit sales) Purchases Debit Purchases Credit Creditors (Being credit purchases) .

Continued Return inwards Debit Return inwards Credit Debtors (Being the return of goods sold) Return outwards Debit Creditor Credit Return outwards (Being credit purchases) .

The same amount will be credited to Trading account to calculate the cost of goods sold. Debit Closing stock Credit Trading (Being the closing stock at the end of a period) . stock will be calculated manually and the value is recorded in a closing stock account.Continued • At the end of a period.

The calculation is Opening Stock Add: Purchases Cost of goods available for sale Less: Closing Stock COST OF GOODS SOLD XXX XXX XXX XXX XXX .Continued • Cost of goods sold will be calculated because there is no record kept.

. a stock account is opened throughout the period to record about the stock movement. • In this stock system. the value of cost of goods sold and the closing stock is really available in the books. Unlike the periodic system. A Cost of Goods Sold account will be opened to record the cost of goods that has been sold.PERPETUAL INVENTORIES RECORD • This method is usually used by firms selling goods that have a high individual unit value such as motor vehicles. furniture and electrical appliances.

Continued Any stock movement will be recorded as follows: Sales Debit Debtor Credit Sales (Being credit sales) Debit Cost of Goods Sold Credit Stock (Being the cost of goods sold) .

Continued Purchases Debit Stock Credit Creditors (Being credit purchases) Return inwards Debit Stock Credit Debtor (Being the amount returned from customers) .

Continued Return outwards Debit Creditor Credit Stock (Being the amount returned to suppliers) .

The stock account will be used throughout the period to record all sales. Purchases. purchases and returns. .DIFFERENCES BETWEEN PERPETUAL & PERIODIC INVENTORIES RECORD • Stock movement will be recorded in the following account: Sales. • Cost of goods sold is maintained • The closing stock can easily be determined from the balance in the stock records. Return inwards and Return outwards • Cost of goods sold is determined by following calculation: Opening stock Add: Purchases Less: Closing Stock • The closing stock is determined by manual counting of stock called as stocktaking • Stock movements are recorded in a stock account.

PURCHASES OF GOODS (STOCKS) • PURCHASES OF GOODS ON CREDIT EFFECT Increase in Assets of stocks DEBIT CREDIT Purchases Creditor Increase in Liability of creditor PURCHASES OF GOODS ON CASH EFFECT Increase in Assets of stocks Decrease in Assets of cash DEBIT Purchases CREDIT Cash .

SALES OF GOODS (STOCKS) • SALES OF GOODS ON CREDIT EFFECT Increase in Assets of Debtor DEBIT CREDIT Debtor Sales Decrease in Liability of stocks SALES OF GOODS ON CASH EFFECT Increase in Assets of cash Decrease in Assets of stocks DEBIT Cash CREDIT Sales .

RETURNS OF GOODS (STOCKS) • RETURN OUTWARDS FROM CREDIT PURCHASES EFFECT DEBIT CREDIT Decrease in Liability of creditor Creditor Decrease in Asset of stocks Return outwards RETURN OUTWARDS FROM CASH PURCHASES EFFECT Increase in Assets of cash Decrease in Assets of stock DEBIT Cash CREDIT Return outwards .

CONTINUED • RETURN INWARDS FROM CREDIT SALES EFFECT Increase in Assets of stocks DEBIT Return inwards CREDIT Decrease in Assets of Debtor RETURN INWARDS FROM CASH SALES Debtor EFFECT Increase in Assets of stocks Decrease in Assets of cash DEBIT Return inwards CREDIT Cash .

ACCOUNTING FOR STOCK • Stock Diagram Purchased goods SUPPLIER (CREDITOR) BUSINESS Sold goods CUSTOMER (DEBTOR) ABC Return outwards Return inwards .

CONTINUED STOCKS/GOODS INCREASE (+) DECREASE (-) Purchase of goods Return inwards Sales of goods Return outwards Recorded in the purchases a/c Recorded in the Return inwards a/c Recorded in the Sales a/c Recorded in the Return outwards a/c .